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Audio Alert: Silver Guru Unveils 2014 Forecast, Blasts Fed

Welcome to this week's market wrap podcast, I'm Mike Gleason.

Coming up is an exclusive interview with top silver analyst David Morgan. You'll definitely want to hear what David has to say about the Fed's recent actions and the outlook for precious metals in 2014. Don't miss this extremely important year-end interview.

But first, let's get to this week's market action.

Well Federal Reserve policymakers were apparently in no mood to spread holiday cheer to gold and silver bulls. On Wednesday, outgoing Federal Reserve chairman Ben Bernanke took steps to shore up the Fed's waning credibility – announcing that Quantitative Easing would be scaled back slightly, beginning in January.

However, the Fed's announcement changes little of substance. The Fed's $85 billion per month bond-buying program will only be reduced by $10 billion. But these figures don't tell the whole story.

The actual, unofficial amount of monthly Fed bond buying got up to about $93 billion per month this year. That's including all the rolling over of matured securities and reinvested interest. A $10 billion cut takes QE down to $83 billion a month – still nearly $1 trillion per year. So rather than being a meaningful reduction from the original $85 billion mandate, the Fed's policy change serves mainly to return the actual level of QE closer to the original target.

Be that as it may, we continue to operate in the type of market environment where any news that comes out gets spun negatively for precious metals by the financial media. The U.S. Dollar Index rallied back above the 80 level, and futures traders pounced on gold and silver.

Gold prices got pushed below the $1,200 mark on Thursday. As of Friday morning, gold trades at $1,196 an ounce, down nearly 4% for the week.

At least the white metals aren't faring quite as badly. Platinum, palladium, and silver are each posting weekly declines of around 3%. Silver prices are currently coming in at $19.28 per ounce – still slightly above the lows established in June.

Looking at the broader commodities complex, copper is roughly flat on the week, while crude oil and other raw materials are pushing higher. And the main beneficiary of Fed liquidity pumping of late – the stock market – also surged higher following the Fed's announcement.

With the Dow touching record highs once again, bullishness toward stocks is off the charts. Sentiment indicators show levels of exuberance exceeding those from the last major market high in 2007. Bearishness among newsletter writers is at record lows. And the public can't seem to get enough of this market. According to TrimTabs, U.S. stock funds have attracted more inflows in 2013 than in any year since 2000.

As any market historian will tell you, euphoric conditions in equities don't last – and usually end badly. So what happens to precious metals when equity markets finally do start selling off? That's one of the questions I posed to our featured guest expert this week, so let's get right to our exclusive interview…

Mike:

I'm happy to welcome back our friend David Morgan of The Morgan Report and silver-investor.com. David, thanks for joining us again, and Merry Christmas to you.

David:

Merry Christmas, and thanks for having me.

Mike:

Well, to start out here, I have to ask you about the big news of the week, of course, that being the Fed announcement. They claim they will begin a 12% tapering of the latest round of QEs, starting in January. Sounds like they felt they had no choice but to do some token amount or see their credibility totally collapse. What do you make of all that? What do you expect moving forward with Fed policy, especially with Janet Yellen taking over as Fed Chair here pretty soon…comment on that first and foremost, and then also the impact it will likely have on inflation and on precious metals prices.

David:

First of all, I wasn't shocked. I thought that they were going to taper, and token amount, I think, is the correct wording. Basically the $10 billion that they are going to taper by is a bit of a misnomer. I had to go through this in very good depth in The Morgan Report for the January issue. They get maturing securities, and they roll those over and apply that to their bond purchases. The actual purchases are really well above the $85 billion mark that's out there for public consumption. It is a gesture. I said on a previous interview that I thought it would be done. Again, I didn't think it would be done at this exact time, and done with an effort to determine some credibility so that some of the suckers that are holding US bonds are likely to maybe continue to hold them or buy more. Secondly, I thought it would be to determine what the market reaction would be without intervention. They're going to take a good hard look at the stock market, the bond market, and the gold market, those three primarily, to see what the reactions will be by this “tapering.”

What effect will it have longer term on inflation? None, really. You continue to add money to the money supply no matter what the rate. That's, by definition, from the Austrian school, inflation. The inflation continues, as heavily or not ... Hmm ... It's decreased by 11%, but again, that's a misnomer because of the maturing securities that, hopefully, some people will understand what I'm saying. It's not that complicated. It'll be outlined again in the full Morgan Report in January exactly what's truly going on. As far as Yellen, when Dr. Greenspan was the Fed Chairman, I constantly referred to him as "Dr. Green Expand," instead of Greenspan. It was "Green Expand," being a moniker for the greenback being expanded under the Greenspan regime. Then, of course, Bernanke took over from there, and was known as "Helicopter Ben."

During this little brief memo that I put out to The Morgan Report subscribers yesterday, I called it, "It's Janet Yeleln, the money supply's a-swellin'." It's the "Swellin' Money Supply" Yellen. She's not going to change anything. In fact, further on into the editorial for The Morgan Report in January I'm going to go into what her bias is and what her thinking is and what her irrational non-Austrian views will do to the decisions made by the Federal Reserve. As Chairman she has a great deal of influence.

None of it adds up for anything but bullishness for hard assets, commodities in particular, real things, real assets, of course. As you know, I think and believe that the precious metals are the top tier of all that. I'm not saying that food is more important than gold. I would say that it is, but I'm saying from a financial perspective that gold and silver are the top tier. Mike, I'm not surprised. I'm concerned as always, maybe overly concerned. I am concerned enough to state that things are not going to be getting better over the next two years or three. They're going to continue to grind down. As I said in my memo, the Fed in my view is starting to lose some control. At some point the market forces are greater than the Federal Reserve.

I know there's probably a lot of listeners would say that I'm full of it, but history bears that out. It doesn't have to be the Americans that do it. It could be China; it could be India. It could be electronics, a platform that goes down. Remember the "fat thumb" trade. There's so many things out there ... Japan.

I mean, everyone's looking at the euro and the eurozone and the austerity and the riots and all that. All that should be observed, but Japan is the second largest holder of US debt after China. With the Chinese and the Japanese both kind of at each other's throat with this island situation, who knows?

That's a tactic too. If the US sides with Japan, which they are, the Chinese might dump some bonds. If it went the other way, which it doesn't look like it would, Japan could do something. It's very tenuous, and it's a lot more fragile than most people would believe. Unfortunately, since it's so massive, and the whole system really is based on the debt markets, once the bond market goes crazy, starts to unravel ... There's probably a better choice of words ... Beware, because things could start to happen and accelerate.

Mike:

Well, speaking of the Fed losing control and those market factors you talk about, many believe the equities market is pretty overheated right now and could be due for a fall. I want your opinion on what might happen to the metals if we did get a major stock market correction. Will we see a big downdraft in the metals like we did in 2008, meaning they get taken down with the stock themselves, or will the PMs actually assume some sort of safe haven asset status in that scenario?

David:

I think this time what you'll see is some kind of sell-off in the metals very, very temporarily. They're pretty much washed out, and I think they've found their bottom, although a massive stock market unwinding could certainly send gold and silver down. I don't think it'd send the mining equities down at all. I mean, it might send them down ever-so-slightly, but they've been washed out. They're thoroughly beaten up. There's no sellers left. I mean, how are you going to sell? If you're going to lower prices, you need more sellers. There's no sellers left for all practical purposes.

I think you would have a very brief downtick in gold, silver, and perhaps some of the mining shares. That would be from a longer-term perspective totally insignificant. Then you would start to see all three of those classes come up: gold, silver, the physical, and all the derivatives that are associated with the physical metals, and mining shares as well.

Remember gold's the most negatively correlated asset to the stock market. If the stock market's unraveling rapidly, and you know what asset is the most encumbered to go the opposite direction, being gold, then, obviously, you would see gold gain some strength. It's one of those things that I think you just have to prepare mentally. One of my favorite quotes is, "Chance favors the prepared mind." Prepare your mind for the fact that if there is a stock market crash, unraveling, sell-off, whatever you want to call it, and I believe that there will be in probably the second or third week of January, that gold and silver could be taken down for a very short time. Prepare your mind for that. Look at it as an excellent opportunity if you want to trade, or even if you don't want to trade. Then know that this would be something that is very temporary and it's going to go the opposite way. I'm very strong on that too, by the way.

Mike:

Another interesting dynamic here, which we've been covering ourselves, and I know you're following this as well ... gold production, despite a big decline in the underlying price of the metal, has not really fallen yet. At roughly $1,200-an-ounce gold, we're barely above the average cost to mine it now.How do you see this resolving itself? Will mining costs somehow fall, or will production fall? What do you think?

David:

Well, the free market, what's left of it, will take care of it. I mean, I know mining fairly well, Mike, as you know. What happens then as price equals production, is it forces gold miners in particular to high grade. What they'll do to stay in business is they'll go after the highest grade they possibly can if they have that choice. Some mines do; some mines don't.

They will cut back staff; they won't do any overtime. They'll just go on kind of repair and maintenance. That's the wrong choice of words, because that's really when, basically, you put a mine down, but they go on a schedule that's a maintenance type and above schedule to produce and stay in business. That's what happens.

They try, if they can, and some mines can, to be able to high grade and make a profit or break even at these levels. Other mines won't have that luxury. They will continue, because it's cheaper to continue to mine at a loss for several months than it is to shut it down right off the bat. That doesn't make sense.

I didn't know that. Now I've been in the industry for so darn long, I learned that the hard way. Being an investor, and still am an investor, I thought, well, "You've make a bad decision here, you're costing me money. You're mining at a loss." That was explained to me. This has been by more than one company. It's been many times presented that it's actually cheaper at a small loss. Once you start to close a mine down, it's very difficult to get it back up.

Then, in contrast, there's a lot of labor contracts, that being that if you lay people off, you've got to give them three months' pay; you've got to do this or that. You've got to continue their health care, or this or that. There's a lot to it. It's a lot more than, "Oh, it's under the cost production; therefore, all these mines that can't produce at that level are going to be shut down," it's much more complicated than that.

What will happen is either the market will take care of it, you'll have less mining or you'll have a higher price, or a combination of both, and most likely a combination of both. You're going to see, a couple of years out, higher prices in the metals and you're going to see some mines that could've, might've, should've, made it, if gold prices were 30% higher than they are now, that fall off to the wayside.

Mike:

In closing here, and we touched on this a little bit earlier, what do you expect for metals next year? We certainly had a rough ride in 2013. What are you looking for in the new year for gold and silver?

David:

I'm in for an up year. I think the worst is behind us. I think the silver bottom is in. I think it happened at the end of June 2013. Certainly it hasn't come way up off of that bottom. That's the way bases are formed. Actually, the longer the base, the more you get coming off the base, believe it or not. That's technical work, and it's been proven in all markets.

I think we're going to see gold and silver prices work their way higher through the first of the year and beyond. I think that you're also going to see the mining equities start to pick up and show some life.

I also think that there's some possibility of a debt market or a financial problem, not necessarily the bond market, but more likely in that area ... It could be anywhere ... that causes perhaps a run to the physical metals. I don't know that; no one does. Certainly there's enough problem there, as you could say, in the financial system, that you would certainly take heed of that statement.

I'm looking for a better year. I think we're going to work our way back up to where we started in 2013. If you look at a chart in January 2013, silver was about $32 and gold was about $1,700. I think it's going to take, probably, certainly most of the year to get ourselves back up to that level. Again, it could get to that level within a matter of months, depending on market conditions and what's happening.

This thing with Japan is not good debt-wise what they're doing with managing their debt. They're not. The concern between the Anglo-American empire, which is waning, and the BRIC axis, which is growing, slashing. They're getting more powerful. China's taking a great deal of physical gold. Russia's keeping their gold.

You're having one set of powers in the financial system, the monetary system, that are pro-gold and taking a lot of physical versus the other side that's held the power for a very, very long time that's willing to give it up to continue in their power. The old adage "He who owns the gold makes the rules," is going to be interesting how this thing shakes out. I'm betting on the gold side.

Mike:

Yeah. It certainly does figure to be very interesting to watch it play out. 2014 could be a big year, like you suggested, but we'll have to wait and see, of course. Finally, David, before we let you go, I certainly want to wish you a Merry Christmas and a Happy New Year. Butbfore you leave us, please tell our listeners how they can find out more about The Morgan Report and your great service there.

David:

Thank you very much, Mike. There are several ways, but I'll give the top three. The easiest is probably get on our YouTube channel. Our YouTube channel is silverguru. If you get on that channel, just about all the interviews I do, like this one, will be posted on there.

Another way to follow my thinking better is to look at our Twitter feed, which is @silverguru22. That is sent out by myself personally and my staff. We actually read things throughout the day that we think are really required reading. We throw those out on our Twitter feed. Then lastly, and probably most importantly, you can go to our website, themorganreport.com and sign up for our free e-letter that comes out weekly. It's called the Economic Update Letter. We go through usually a question sent in by a reader or some activity that's taken place, either in the gold and silver markets or in the economic field. Generally speaking, we address that.

We also link to some of the interviews that we do during the week. Those are all for free. As far as the main body letter, that's all addressed on the front page of the website. Details are up on the right hand side on a drop down window.

Mike:

Well, excellent insights as usual. We always appreciate your time. Again, the website is silver-investor.com. Everybody should go and check that out. David, we look forward to catching up with you in 2014.

Well, that will wrap it up for this week. Don't forget to tune in next Friday for our last weekly Market Wrap podcast of 2013. Until then, this has been Mike Gleason with Money Metals Exchange. Thanks for listening, and a Merry Christmas to everybody.

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Thank you for joining us for this edition of the Money Metals Exchange Weekly Market Wrap. Be sure to come back next week, and don't forget to subscribe to our weekly podcast through iTunes. For answers to all of your questions, or to discretely and securely buy or sell gold or silver coins, bars, and rounds, call 1-800-800-1865. Our knowledgeable and no-pressure specialists are standing by between 7:00 a.m. and 5:30 p.m. mountain time, Monday through Friday. Visit us at www.MoneyMetals.com or call 1-800-800-1865.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 80,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.